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Asrokhel 146

With Surface already out and a Windows Phone possibly on the way, it's clear that Microsoft means to become a big player in hardware -- but it will need to open up its checkbook.

Microsoft's move into hardware may see it "eating hard rice," in the words of one peeved partner, but moving it is. After introducing Surface, rumors are that more products are coming. But if Microsoft is to truly adopt the Apple model, it will need to bulk up. There are at least two vendors that Redmond is likely eyeing as it transitions from a software-only company into a supplier of all-in-one systems like the Mac and iPad.

First, some background. Microsoft last month shipped the Surface RT tablet, its first real entry into PC hardware beyond peripherals. Surface runs a version of Windows 8 called Windows RT, which is limited to Metro-style apps that can be obtained only from Microsoft's online Windows Store. Now there are reports that Microsoft is prepping not only its own version of a Windows Phone 8 phone, which would compete with models from partners like Nokia, HTC, and Samsung, but that it's also working on a 7-inch version of Surface, dubbed Surface Mini.

So Microsoft may be getting into the hardware game for keeps. What's behind the moves? For starters, the company is sick of watching Apple's beautiful new products draw raves and set fanboy hearts afire while its partners come out with Windows-based devices that, well, let's just say can be less than impressive.

Thanks in part to Microsoft itself (and its Windows licensing fees), the PC clone business has always been about volume over quality, and quantity over margin.

To be sure, some vendors, like Dell and its XPS 12, have produced impressive Windows 8 devices. But on balance, the OEM community was never really geared for building showroom pieces. With Surface, and other possible hardware offerings, Microsoft wants to show what Windows can really do when paired with first-class hardware.

Second, Apple has proven the efficiency, reliability and commercial potential of the closed-loop app model. By controlling developers' access to its devices by forcing distribution through the App Store, Apple can control the quality and user experience of the software that runs on its platforms. It may not be Microsoft's fault that an application runs like crap on Windows, but the user who just shelled out for the software doesn't care. It's guilt by association. Microsoft can see how well the closed-loop model is working for Apple, and it wants in on that.

To some extent, it already is. The Windows Store is the only source for Metro-style apps. Still, it's tough to exercise quality control without controlling the hardware environment. Currently, there are dozens of OEMs building Windows 8 hardware.

Finally, Microsoft needs to change its business model because its existing one, selling software, will eventually go away. Android is the leading OS for smartphones, and Google charges exactly zero dollars for it. Google Apps for Business starts at just $5 per month, per user. And IBM's Lotus Symphony suite, which includes documents, spreadsheets, and presentations? That's also free.

Microsoft offers low-cost, cloud-based apps through Office 365. But it also rakes in big bucks for the client versions of Office, which start at $120. The days it can continue to do this are numbered. There's just too much free or low-cost stuff out there. So how does combining software, a business with diminishing returns, with hardware, which traditionally operates at razor-thin margins, help Microsoft?

In a couple of ways. One is by bundling. General Motors doesn't sell individual engines, or transmissions, or cup holders, because it can charge more than what those piece parts are worth by putting everything together in the form of a car. The other is that Redmond could drive a lot of players out of the industry if it expands into hardware, particularly if it decided to no longer license the Windows operating system to third parties. Less competition means higher prices, and fatter profits.

In the past, withholding Windows would have brought down the antitrust regulators down on Microsoft. But if you view today's computer market broadly, to include smartphones and tablets, it's hard to argue that the company is in a position to dominate. This is why Redmond's partners are getting antsy. Lingxian Lang, China operations manager for Acer, recently said that Redmond's plan to compete with partners would ultimately see it "eating hard rice."

Perhaps, but Microsoft appears ready to take the risk. This is where acquisitions come in. If Redmond is to be a legit hardware player, it needs to do more than just contract out manufacturing to third parties. It needs to get in the game.

For hardware design and manufacturing, there is a huge global network just waiting to get scooped up. And it happens to belong to one of Microsoft's closest partners, Nokia, which could be had for a relative song. Nokia's stock price closed at $2.64 on Wednesday. Using the 42% premium that Oracle paid to get into the hardware business by purchasing Sun Microsystems as a guide (like Nokia, Sun's hardware business was failing but the company retained valuable software and IP assets), Nokia could be bought -- lock, stock, and worldwide production network -- for about $14 billion, based on Thursday's market cap of about $9.8 billion.

Acquiring Nvidia, on which it has first right of refusal, would give Microsoft one of the most strategic aspects of hardware business. Apple products tend to just work because it can fine-tune its software and chips to work together as much as necessary before launching a product. Apple's ARM-based family of mobile processors need to do only one thing well -- run Apple software. That may be why Apple is reportedly contemplating ARM for the Mac and dumping Intel.

Nvidia wouldn't go cheap, as it would likely have many suitors (Google?). It could sell for 50% or more over market cap, so figure $14 to $15 billion. But Microsoft, as of the close of its most recent quarter, was sitting on $66.6 billion in cash, equivalents and short-term investments -- enough to swallow up both Nokia and Nvidia.

Will these deals happen? Hard to say for sure, but it's a good bet they're at least under discussion as Microsoft moves closer to the Apple model.

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Phouchg 2,050

I guess many would rather like Microsoft to set sights for AMD. It's not doing well, is in desperate need of sponsorship and revitalization. Also cheaper. Except for the veto deal with the greens here, also quite logical what with AMD chips having found their way into next Xbox and other next-gen consoles - if is approved by respective bodies, could also anger Sony quite a lot.

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redvamp128 321

I guess many would rather like Microsoft to set sights for AMD. It's not doing well, is in desperate need of sponsorship and revitalization. Also cheaper. Except for the veto deal with the greens here, also quite logical what with AMD chips having found their way into next Xbox and other next-gen consoles - if is approved by respective bodies, could also anger Sony quite a lot.

Actually that would be a good powerhouse for Microsoft .... I mean then there would be better video drivers for Windows.

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Anibal P 2,005

Anibal P 2,005

I don't see how this would pass regulatory muster, people already think MS is running a monopoly, they try and buy one or both and half the people here would be screaming about monopolistic this and that nonsense, same if they went for AMD

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calimike 32

Nvidia Corp.'s NVDA +0.56% fiscal third-quarter profit rose 17% as the chip maker continued to benefit from strong demand for its processors across devices.

For the current quarter, the company expects revenue of $1.03 billion to $1.18 billion, short of the $1.21 billion estimate from analysts polled by Thomson Reuters.

The company also said that it is initiating a quarterly dividend of 7.5 cents, giving it an annual yield of around 2.4%. In another effort to reward shareholders, the chip maker said that it is extending its existing $2.7 billion share-repurchase program through Dec. 2014.

"Given our strong financial position and ongoing ability to generate cash, we are well positioned to continue investing in our future," said Chief Executive Jen-Hsun Huang.

Nvidia is best known for chips called graphics processing units, or GPUs, that generate visual effects in video games played on personal computers and consoles. Aiming to offset a weak PC market, the company has lately made a strong move into the mobile chip market. It has enjoyed particular strength from tablets, with both Google Inc. (GOOG -2.22%) and Microsoft Corp. (MSFT -0.93%) using Nvidia chips in their devices.

The company had previously warned the third quarter would be affected by supply constraints, as contract manufacturers have struggled to meet demand for certain advanced chips.

For the quarter ended Oct. 29, Nvidia reported a profit of $209.1 million, or 33 cents a share, up from a year-earlier profit of $178.3 million, or 29 cents a share. Excluding items like stock-based compensation, per-share earnings rose to 39 cents from 35 cents. Analysts expected earnings of 30 cents a share.

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LOC 706

If Microsoft buys Nvidia, PC gaming is in total doo doo. I mean, MS doesn't support PC gaming as it is (even though they say they do lulz) now, imagine if they owned Nvidia itself. My lord it could be a total disaster for PC gaming enthusiasts.

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ahhell 1,306

If Microsoft buys Nvidia, PC gaming is in total doo doo. I mean, MS doesn't support PC gaming as it is (even though they say they do lulz) now, imagine if they owned Nvidia itself. My lord it could be a total disaster for PC gaming enthusiasts.

Why the **** would MS buy Nvidia only to shutdown manufacturing Video cards for PCs? :|

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mrmomoman 18

Nokia won't be bought out. If you look at the Volume of purchasing of Nokia then you will see that is being seen as an undervalued stock. Three out of the Four Divisions are profitable at this moment and with the Nokia Handsets penetrating India at over 25% now and Italy at over 22% they are just ramping up. In Italy the Lumia 920 has sold out twice. They love the phones and Nokia will do well with China too. These markets will be big for them and if they continue to grow their share in those markets the US is the least of its concerns.

Nokia is playing it for the long haul. Market reception of the Windows Phone 8 no matter which manufacturer is a boost to all the manufacturers in the WP8 game. That is why ELOP said he wasn't worried about Microsoft entering into the phone business. It would only help Nokia out with licensing their software apps they have now. Google has their maps for Android and Nokia will have their maps for WP8. They have already said they will release it to other handsets if they want to utilize it. NAVTEQ is more robust worldwide and is more rail/subway/pedestrian friendly than Google.

Microsoft doesn't need to buy out Nvidia. They are doing well on their own.

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LOC 706

LOC 706

Why the **** would MS buy Nvidia only to shutdown manufacturing Video cards for PCs? :|

I never said they would stop manufacturing video cards for PCs. However, if MS owned Nvidia, AMD would be the only real dedicated PC video card manufacturer out there. Nvidia would be doing hardware for MS products obviously and while this doesn't necessarily mean no PC hardware, it just screams of a disaster for PC gamers to me.

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ahhell 1,306

ahhell 1,306

I never said they would stop manufacturing video cards for PCs. However, if MS owned Nvidia, AMD would be the only real dedicated PC video card manufacturer out there. Nvidia would be doing hardware for MS products obviously and while this doesn't necessarily mean no PC hardware, it just screams of a disaster for PC gamers to me.

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Scorpus 208

Microsoft won't buy either of these companies. They've proved with the Surface that they are perfectly capable of building good mobile hardware by themselves and they could easily build a phone without Nokia on-board.

As for NVIDIA well I doubt any current NVIDIA board would approve a buyout by Microsoft.